LONDON- Oil prices ticked up on Thursday after U.S. oil product stocks shrank, providing bulls with ammunition ahead of a meeting between OPEC producers and their allies to discuss their future output strategy.

Brent crude LCOc1 futures were up 34 cents at $41.05 a barrel at 1144 GMT. U.S. West Texas Intermediate (WTI) crude CLc1 futures rose 15 cents to $38.11 a barrel.

Both benchmarks were down about 2% earlier in the session as worries about fuel demand rose after a surge in coronavirus cases led Beijing to cancel flights and shut schools and several U.S. states, including Texas, Florida and California, reported sharp increases in new cases.

But the decline in the market then prompted more bullish investors to move in.

A rise in U.S. crude stockpiles to a record high for a second week in a row weighed on sentiment, but U.S. government data showed lower inventories of gasoline and distillates, which includes diesel and heating oil, indicating higher demand. 

"Gasoline and distillates both fell unexpectedly... Add to that that oil producers are still feeling the impact of the rout from March and April as (U.S.) crude oil output is now down at 10.5 (million barrels per day) and you might conclude that bulls have a case in point," PVM oil analysts said in a note.

The Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, was due to hold an online meeting from 1200 GMT to discuss the future of a record 9.7 million barrels per day (bpd) output cut. 

Thursday's discussion was unlikely to recommend extending record cuts into August, sources said. OPEC+ compliance with crude production cut commitments in May was 87%, two OPEC+ sources said on Wednesday.

Iraq and Kazakhstan are expected to present their plans for production cuts and compensation for overproduction at the meeting.

OPEC warned in a monthly report that the market would remain in surplus in the second half of 2020 even as demand improves, as it now expects supply from outside the group to be about 300,000 bpd higher than previously thought. 

(Additional reporting by Sonali Paul in Melbourne and Roslan Khasawneh in Singapore; editing by David Evans/Mark Potter/Susan Fenton) ((Shadia.Nasralla@thomsonreuters.com; +44 207 542 5083; +44 778 99 43141; Reuters Messaging: Reuters Messaging: shadia.nasralla.reuters.com@reuters.net))